Economic Governance Review Commission Communication on the - - PowerPoint PPT Presentation

Economic Governance Review

Commission Communication on the application of the six-pack and two-pack legislation

Karl Scerri and Monika Sherwood DG Economic and Financial Affairs European Commission

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Outline

• 1. Context and general approach of the review
• 2. Fiscal surveillance framework
• 3. Surveillance of macroeconomic imbalances
• 4. Support to euro-area Member States with financial stability issues
• 5. Open questions for a public discussion and next steps

• First review published on 28 November 2014, but it was based
• n insufficient experience with the reformed framework.
• Legislation requires a review every five years thereafter.
• Where appropriate, the report shall be accompanied by

proposals for amendments.

Review of the six- and two-pack: a legal requirement

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• Secondary legislation
• Regulation (EC) 1466/97(‘preventive arm’): aims to ensure sound budgetary positions
• Regulation (EC) 1467/97(‘corrective arm’): aims to correct gross policy errors
• Six-pack legislation
• Five Regulations: strengthened the SGP and established surveillance of macroeconomic

imbalances

• One Directive: setting requirements regarding national fiscal frameworks
• Two-pack: two Regulations specifically for euro area Member States given risk of

spillovers

• Other documents that specify the implementation of surveillance
• Code of Conduct of the SGP / Code of Conduct on the two-pack
• Vade Mecum on the SGP / Compendium on the MIP
• Commission Communication and commonly-agreed position on flexibility

in the SGP, etc.

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Legal basis of the governance framework

Comprises one Communication and two Staff Working Documents Assessment of effectiveness of the surveillance framework, with a focus on the six-pack and two-pack Economic context has materially changed over the last decade

• Challenges posed by low potential growth, low interest rates, low inflation, low reform momentum
• Need to transform our economies: become the first climate-neutral continent, be fit for the digital

age, deal with population ageing and ensure that nobody is left behind.

Plans for an inclusive debate with stakeholders following the Communication

• Open but precise questions to guide the debate with stakeholders
• Decide on follow-up by the end of 2020

General approach of this review

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Outline

• 1. Context and general approach of the review
• 2. Fiscal surveillance framework
• 3. Surveillance of macroeconomic imbalances
• 4. Support to euro-area Member States with financial stability issues
• 5. Open questions for a public discussion and next steps

Sustainability: excessive deficit procedure effective in bringing deficits below 3%

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• The corrective arm has been

an effective tool for reducing and maintaining government deficits below the 3% threshold.

• Effectiveness of simple

numerical rule: easy to grasp

• But: problem of nominal

strategy under EDP.

• 4.0
• 2.0

0.0 2.0 4.0 6.0 8.0 10.0 RO FR ES IT HU BE FI PL SK LV EE PT LT HR CZ IE SE AT SI BG DE MT EL NL DK LU CY EU28

Budget deficit by Member State (% of GDP, 2019 versus 2009)

2019 2009

Deficits Surpluses

3% deficit ceiling

Sustainability: aggregate debt has fallen, but remains very high in some Member States

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BE BG CZ DK DE EE IE ES FR HR IT CY LV LT LU HU MT NL AT PL PT RO SI SK FI SE UK

• 5
• 4
• 3
• 2
• 1

1 2 3 4 5 6 20 40 60 80 100 120 140 Structural balance (%potGDP, 2018) Gross debt (%GDP, 2018) High debt / structural surplus Low debt / structural surplus Low debt / structural deficit Fiscal space availabe High debt / structural deficit Significant adjustment needs

• Most high-debt Member States

still far away from their MTO, despite interest windfalls.

• Insufficient traction of preventive

arm in those Member States: Failure to use favourable conditions to reduce debt and build buffers. → Did 3% act as a target rather than a ceiling?

• Too much focus on Member

States with minor fiscal imbalances?

• Fiscal policies remained pro-cyclical

in many Member States:

• fiscal consolidation in 2011-13 (incl.

market pressure)

• lack of adjustment when economic

conditions improved

• better compliance with fiscal rules

would reduce pro-cyclicality

• The EU cannot enforce the

aggregate EA fiscal stance.

• Monetary policy at ELB: What role

for fiscal policy in policy mix?

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Fiscal stabilisation: Problem of pro-cyclicality

• 4.0
• 3.0
• 2.0
• 1.0

0.0 1.0 2.0

• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Change in the EU structural deficit versus output gap (% of GDP)

change in the structural deficit (lhs)

• utput gap (rhs)

pro-cyclical consolidation counter-cyclical fiscal expansion broadly neutral

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Growth-friendliness: public investment declined during consolidation

2.0 2.5 3.0 3.5 4.0

Public investment in the EU (% of GDP)

Recession 6-Pack 2-Pack

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

HU LV EE SE PL MT CZ BG FI HR LU SI FR EL LT DK NL SK RO AT BE DE IE IT CY ES PT EU28

Public investment by Member State (% of GDP, 2019 vs 2009)

2019 2009

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National fiscal frameworks

• Institutional strengthening
• National rules
• Independent fiscal institutions
• Medium-term planning
• Independent forecasting
• Supports compliance with EU

fiscal rules + increases ownership But:

• Differences in design and implementation practices
• Sometimes not fully aligned with EU rules (Fiscal Compact)

5 10 15 20 25 30 35 40 2010 2012 2014 2016 2018

Number of independent fiscal institutions in the EU

• Complexity and lack of predictability harm communication and ownership: multiplicity of

rules, divergent compliance indicators, reliance on unobservable and unstable variables, numerous clauses allowing for deviations

• DBP process: useful for ex ante coordination
• EU rules better taken into account in budget process;
• difficulty of influencing national fiscal policy in practice.
• Reluctance to launch enforcement procedures and impose financial sanctions.
• SDP only in very clear-cut cases (and only non-EA MS so far)
• no debt-based EDPs (despite breaches of debt reduction benchmark)
• no financial sanctions under EDP (six- and two-pack shifted responsibility on COM)
• Emphasis on compliance with annual requirements.
• the medium-term orientation of fiscal policy is insufficiently taken into account.
• focus on adjustment to MTO distracts from differentiating overall fiscal risks between countries.

Governance and ownership

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Outline

• 1. Context and general approach of the review
• 2. Fiscal surveillance framework
• 3. Surveillance of macroeconomic imbalances
• 4. Support to euro-area Member States with financial stability issues
• 5. Open questions for a public discussion and next steps

• MIP widened EU governance and surveillance beyond public finances
• Greater focus on other issues relevant to macro stability (e.g.,

external positions, competitiveness, housing, private debt, financial sector)

• Complementary to SGP but links have not been fully exploited
• Broadened to include adjustment issues, has to capture new

challenges with macro relevance, e.g. issues related to climate change

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Monitoring imbalances: Scope of MIP

Stock imbalances: Improving but persistent

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Private sector debt

60 80 100 120 140 160 180 200 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 % of GDP In MIP for at least 3 years, private debt as a source of imbalances Other EU countries

Recession 6-Pack 2-Pack

Symmetry of rebalancing: MIP more successful in reducing current account deficits than large and persistent surpluses

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Euro area current account balance

• 4
• 3
• 2
• 1

1 2 3 4 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19f DE ES FR IT NL Other EA-19

% of EA GDP

Effectiveness and ownership

• MIP has raised awareness and focused policy attention on imbalances
• Deepened (and structured) dialogue at EU level
• Uneven political traction - how to maintain policy responsiveness?
• Scope to improve transparency of implementation
• Instruments not yet fully exploited (EIP)
• Limited ability to achieve symmetry in external adjustment
• Ability to prevent new imbalances and vulnerabilities still to be tested

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Outline

• 1. Context and general approach of the review
• 2. Fiscal surveillance framework
• 3. Surveillance of macroeconomic imbalances
• 4. Support to euro-area Member States with financial stability issues
• 5. Open questions for a public discussion and next steps

Regulation 472/2013: Supporting Member States facing financial difficulties

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• Provides surveillance framework for euro area Member States under:
• macroeconomic adjustment programmes
• post-programme surveillance
• enhanced surveillance
• All Member States concerned (Cyprus, Greece, Ireland, Spain and Portugal) have

successfully returned to market financing, external and fiscal deficits were largely resolved and the stability of the financial sector restored.

• Improved accountability: stronger dialogue with EU and national parliaments.
• Provides flexible and robust framework for implementation of the governance

arrangements across institutional partners, including ESM.

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Outline

• 1. Context and general approach of the review
• 2. Fiscal surveillance framework
• 3. Surveillance of macroeconomic imbalances
• 4. Support to euro-area Member States with financial stability issues
• 5. Open questions for a public discussion and next steps

First half of 2020:

Inclusive debate with all stakeholders:

• Council / Committees
• European Parliament
• European Central Bank
• European Economic and Social Committee
• Committee of the Regions
• National Parliaments
• National Central Banks
• Independent Fiscal Institutions & National Productivity Boards
• Social partners, civil society organisations and NGOs
• Academic institutions and think tanks

Next steps: Consultation / Dialogue (1)

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Stakeholders can express their views in various fora:

• Council and Committee discussions
• dedicated (bilateral) meetings
• Workshops and stakeholder seminars
• Outreach events in member states
• Online consultation platform for all citizens and organisations

By end-2020: Commission to finalise its stance on possible future steps

Next steps: Consultation/Dialogue (2)

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Rebuilding trust and consensus on the policy goals:

• How to better ensure sustainable public finances and tackle

macroeconomic imbalances

• How to avoid pro-cyclicality
• How to support growth-friendly public finances and incentivise reforms and

investment to tackle economic, social and environmental challenges

• How to take into account euro area dimension and EMU deepening

Questions for public discussion

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How to achieve the policy goals:

• How to make the framework simpler and more transparent
• How to make the framework more focused on “gross errors”
• How to ensure effective enforcement
• What role for national frameworks and how to improve interaction with EU

rules

• How can the SGP and MIP work better together

Questions for public discussion

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Thank you

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Reserve slides

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Six-Pack Regulation No 1176/2011 “on the prevention and correction of macroeconomic imbalances”: Lays out the details of the macroeconomic imbalance surveillance procedure Regulation No 1174/2011 “on enforcement measures to correct excessive macroeconomic imbalances in the euro area”: Possible sanctions on other corrective procedures under the MIP for EA MS Regulation No 1175/2011 “amending Council Regulation (EC) No 1466/97 on the strengthening of the surveillance

• f budgetary positions and the surveillance and coordination of economic policies”:

Strengthening of the preventive arm through expenditure benchmark and significant deviation procedure Regulation No 1177/2011 “amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation

• f the excessive deficit procedure”: debt reduction benchmark, ‘comply-or-explain’

principle for the Council Regulation No 1173/2011 “on the effective enforcement of budgetary surveillance in the euro area”: details possible sanctions under the preventive/corrective arm of SGP Directive 2011/85 “on requirements for budgetary frameworks of the Member States”: specific requirements w.r.t unbiased forecasts, numerical fiscal rules and medium-term fiscal planning Two-Pack Regulation No 472/2013 “on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area”: programme support and surveillance for EA MS under financial stress Regulation No 473/2013 “on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability”: common budgetary timeline for the EA (assessment of draft budgetary plans)

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• Sustainability of public finances
• Economic stabilisation at the level of individual Member States and euro area
• Quality of public finances, including the development of public investment
• Ownership and governance of EU fiscal rules
• National fiscal frameworks

Assessment of the fiscal surveillance framework

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Sustainability: excessive deficit procedure effective in bringing deficits below 3%

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0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

EU budget deficit (% of GDP)

• 4.0
• 3.0
• 2.0
• 1.0

0.0 1.0 2.0 3.0 4.0 RO FR ES IT HU BE FI PL SK LV EE PT LT HR CZ IE SE AT SI BG DE MT EL NL DK LU CY EU28

Budget deficit by Member State (% of GDP, 2019)

Deficits Surpluses 3% deficit ceiling

Recession 6-Pack 2-Pack

Sustainability of public finances: some convergence of deficit levels

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Sustainability: aggregate debt has fallen, but remains very high in some Member States

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50.0 55.0 60.0 65.0 70.0 75.0 80.0 85.0 90.0 95.0

Public debt in the EU (% of GDP)

20 40 60 80 100 120 140 160 180

EL IT PT BE FR ES CY HR AT HU SI FI DE IE NL SK PL MT LT LV RO SE DK CZ BG LU EE EU28

Public debt by Member State (% of GDP, 2019)

Recession 6-Pack 2-Pack

Sustainability of public finances: large differences in debt levels

20 40 60 80 100 120 140 160 180

EL IT PT CY BE FR ES UK HR AT SI HU IE DE FI NL SK PL MT SE LV RO DK LT CZ BG LU EE EU28

Gross debt (% of GDP) pre-crisis 2018 postcrisis peak

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• Compliance with the preventive arm

has improved since SGP reform,

• incl. for high-debt MS
• Partly thanks to interest and

revenue windfalls.

• Despite improvement, still

insufficient use of favourable conditions to build buffers.

Sustainability of public finances: mixed results of preventive arm

• 6.0
• 5.0
• 4.0
• 3.0
• 2.0
• 1.0

0.0 1.0

Structural balance (% pot. GDP)

MS with debt > 80% of GDP in 2011 (IT, PT, IE, BE, FR, AT, UK, HU) MS with debt between 60 and 80% of GDP in 2011 (DE, MT, ES, CY, HR, NL) MS with debt < 60% GDP in 2011 (PL, FI, SI, DK, SK, LV, CZ, SE, LT, RO, LU, BG, EE)

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• Fiscal policies remained pro-cyclical

in many Member States:

• fiscal consolidation in 2011-13 (incl.

market pressure)

• lack of adjustment when economic

conditions improved

• Compliance with fiscal rules

reduces pro-cyclicality

• The EU’s ability to coordinate the

aggregate fiscal stance for the euro area remains constrained

• Monetary policy at ELB: raises

question of role for fiscal policy in policy mix.

Economic stabilisation

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• Pact in principle neutral regarding the composition of revenues and

expenditures, but may affect public investment in specific cases: easier to cut public investment.

• On the other hand: debt sustainability and macroeconomic stability and debt

sustainability necessary conditions for public and private investments.

• Pact recognises role of investment:
• when assessing existence of excessive deficit;
• flexibility for investment.
• However: 2015 flexibility had limited impact (restrictive eligibility conditions)
• Challenges ahead: green transition, digitalisation, demographic ageing

Quality of public finances

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National fiscal frameworks

Significant development of Member States’ fiscal frameworks…

0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1 until 2011 new/reformed rules 5 10 15 20 25 30 35 40 2010 2012 2014 2016 2018

Main design features of new or reformed national rules Number of independent fiscal institutions in the EU

Source: Commission’s Fiscal Governance Database.

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• Institutional strengthening
• Support to compliance with

EU fiscal rules

• Increased national
• wnership of fiscal discipline
• Differences in design and

implementation practices (EU law sets only minimum requirements)

• Sometimes tensions with

EU rules (Fiscal Compact)

National fiscal frameworks (ctd)

… leading to:

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Fiscal surveillance: Key findings

• All excessive deficits have been corrected and half of the Member States reached their

medium-term budgetary objective.

• Aggregate public debt declined but remains high in some Member States that did not build

buffers during favorable economic times.

• Rules did not prevent pro-cyclical policies in some Member States, and the ability to

coordinate the aggregate fiscal stance for the euro area remains constrained.

• The framework did not prevent a decline in public investment during fiscal consolidation;

flexibility (2015) had limited impact.

• Rules have become increasingly complex and not always transparent, hampering

communication and ownership in the rules.

• National frameworks have been strengthened, but the interplay with EU rules is not always
• ptimal.

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• Number of shortcomings related to design, implementation and enforcement.
• Need to simplify the rules in order to increase ownership, improve

communication, and reduce the political costs for enforcement and compliance.

• An effective framework needs to ensure sustainability where it is most

necessary, while allowing for macro-economic stabilisation in both good and bad times. What role for fiscal policy in policy mix in a changed economic context?

• What should be the role of the EU surveillance framework in helping to

protect investment, promoting a growth-friendly composition of public finances and sustaining adequate levels of investment, in particular in the context of the European Green Deal?

Overall assessment of the fiscal framework

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